Life Matters: taking care of your assets and planning for the future

Cash as gifts, inheritance tax, and the power of planning

Even though it still feels summery, Christmas is not far off.

And if you're considering cash gifts for the children or grandchildren this Christmas, you might find this subject of interest. But whatever the time of year, it's always a good time to be reviewing and planning ahead where your largest assets are concerned.

"Life Matters" for Lymington with Paula from Lester Aldridge

The next in our new "Life Matters" monthly series on those niggling legal matters, a nudge most of us need, this time in the direction of tax planning. In her usual friendly informal style Paula Shea from Lester Aldridge takes a look at gifts and inheritance tax.

Gifts and Inheritance Tax

Q: When is inheritance tax payable?

A: When you die, your family pays inheritance tax (IHT) on the value of the assets you own when you die, and also on any gifts made in the previous seven years. Either you or your family may also have to pay IHT on other lifetime gifts, too.

Q: How much is IHT?

A: The basic rate of IHT on death and on gifts in the previous seven years is 40%.

IHT on gifts more than three but less than seven years before death can be less than 40%.

There is 20% IHT on lifetime gifts to most trusts.

Q: Are there any reliefs?

A: Yes, the following are normally free of IHT:

Most gifts more than seven years before you die.

The first £325,000 (the current nil rate band) given away in the seven years before you die or which you leave on your death.

Up to a further £325,000 given away in the seven years before you die or which you leave on your death, if your deceased spouse or civil partner did not use their full nil rate band allowance.

Any assets transferred outright between husband and wife.

All gifts to UK charities.

Small lifetime gifts, for example the first £3,000 in each tax year.

Regular lifetime gifts you make from your income.

Some categories of business and agricultural property

Residence Nil Rate Band – depending on your circumstances and value of your estate. To be covered in a separate article.

Q: Ah, so gifts in my lifetime are free of IHT? That means I can put my home and my savings in the children's names now?

A: Yes one way to save IHT is to give away assets in your lifetime - if you live for at least seven years, the gift is free of IHT. But, don't do this without careful planning because if you benefit from an asset you have "given away", IHT is payable as it you still owned it. This is known as a gift with reservation of benefit (GROB).

So, don't give any assets away which you may need yourself

The golden rule is not to give away assets which you may need to maintain the standard of living that you want to enjoy into the future.

Q: Oh! What planning steps should I take?

A: The first step is to prepare a list of your assets and liabilities, with approximate values. Don't forget to include benefits under pension schemes and life policies and anything you expect to receive in the future.

If you plan to make gifts in your lifetime, you should also prepare an estimate of your income and expenditure.

Establish your priorities!

How much will you and your spouse need for the rest of your lifetimes and for the lifetime of the survivor? Aim to keep enough income for the lifestyle you want and enough capital for emergencies and extras. Remember that a widow's pension is often substantially less than her husband's pension.

Are your children to inherit equally? Are some assets to go to only some of your children? If so, consider how the other children will be provided for.

"Lifetime Giving"

Lifetime giving can be very effective at minimising IHT, but beware of capital gains tax (CGT). You have to pay CGT on a gift of an asset as if you were selling it for its market value. CGT can be deferred (“held over”) on some gifts but taper relief will be lost.

Use annual and special exemptions:

The first £3,000 you give away each tax year

The previous tax year’s £3,000 if unused

Gifts on marriage of £5,000 by each parent, £2,500 by each grandparent and £1,000 by others

No more than £250 to any one donee each tax year

Married couples can transfer assets freely between themselves. Channelling gifts through the younger spouse may reduce the risk of IHT.

Consider how to share assets in the most effective way (which may also save income tax orcapital gains tax).

Give away assets likely to increase substantially in value. Even if you die within seven years the value for IHT will be frozen at the date of the gift.

If you have surplus income, consider regular giving. Regular gifts from spare income are free of IHT without limit.

Q: Are there any other complexities?

This guide can only provide a brief summary of some of the main features of IHT. As with other taxes, there are many complicated and detailed rules laid down by Parliament.

Free consultation with Paula

Paula’s overriding message always, is to try and plan ahead. And a little professional help can come in handy.

Paula is also well aware that you need to be able to trust in the person with whom you share your confidential information.

Which is why as Partner with Lester Aldridge who looks after probate, wills and estates, she is happy to offer a totally free and no commitment initial consultation. This meeting can take place in person at your home or the Lester Aldridge offices in Bournemouth, or on the phone as preferred. You can talk over the specifics of your situation with Paula, and take things from there.

Contact Paula directly to arrange your free consultation, please mention any specific topic you'd like to cover: This email address is being protected from spambots. You need JavaScript enabled to view it.